Time To Step Back From The Brink And Start Some Serious Negotiations

One of the amazing elements of the stormy debate over the collapse of the Turkish currency is just how much it is a dialogue of the deaf. On one side is the enraged, cornered Turkish president Tayyip Erdoğan whose only response the economic crisis enveloping his country is to cast the drama as yet another independence struggle against ravenous ‘imperialist’ powers determined to undermine Turkey’s emergence as a great power.

Currency speculators around the world smell blood in the water and are undoubtedly very active in Turkish Lira trades. But that is an effect, not the cause of the crisis. So far, the Turkish president has not uttered a word about the disastrous economic policies of the last several years that led to this collapse. But the speculators may have to wait a long time for the currency’s total collapse. One has to respect Erdoğan’s courage and resilience if not his economic acumen.

Like the Raging Bull  Erdogan may be battered but he is still standing

There is also not a word in the closely controlled Turkish media about the real crunch that local companies are facing because of the eroding currency. According to a report in The Financial Times some importers having trouble with shipments because suppliers are having difficulty pricing their goods. Prices of dollar-denominated Turkish bank bonds dropped like a stone sending their yields up sharply. And the debt repayment schedule looms larger and larger. In the next 12 months private non-financial institutions will have to repay or roll over $66 billion in foreign currency debt. For the banks alone that number is $76 billion. These repayments get even more difficult as hard-hit corporates struggle to repay their loans from Turkish banks. This could lead to a sharp increase in what’s politely called ‘non-performing loans’, i.e. loans that are not being repaid. The government will undoubtedly put pressure on the banks not to classify these loans as ‘non-performing’, but at a certain point the economic reality will disrupt that fantasy.

On the other side of the debate you have commentators in all the standard financial journals, social media, and television endlessly forecasting doom and gloom unless Turkey immediately adopts the typical IMF recipe of higher interest rates, curtailed lending, and sharply reduced government spending. Not a word from them about how demeaning this must seem to a country with great power pretensions like Turkey. Turkey is indeed a geo-politically significant country. And driving it into an embittered corner where it retreats into a sullen isolationist shell is to no one’s advantage. Suddenly the old saying ‘A Turk has no friends but a Turk’ looks more and more relevant to many Turks. I appreciate that Erdoğan is a hard person to sympathise with, but one has to realize that there are 80 million people in Turkey – about half of whom don’t like Erdoğan either. Whether they like Tayyip Erdoğan or not, however, they all deeply resent receiving lectures that are quickly interpreted as insults and infringement on their hard-won national sovereignty. The vast majority of Turks I know – no matter how ‘Western-oriented’ they may be --would rather suffer great economic pain and eat grass than submit to this type of behaviour.

And on top of this you have Donald Trump -- for whom the word nuanced simply does not exist. He much prefers the bludgeon to the scalpel, and doesn’t seem to care how much damage he causes – especially when there is a tricky election just over the horizon. Right now, he is using the power of the US dollar as the global reserve currency in an attempt to force people and countries to do what he wants. Yes, the dollar is a very powerful weapon. Yes, the vast majority of global trade is in dollars. Yes, most global commodities are priced in dollars. But, most important, perhaps, is ability of the United States to punish banks around the world by levying heavy fines for what the US Treasury deems inappropriate activity. Failure to pay the fines is essentially a death sentence for the banks because they can be shut out of the US financial system. Without access to the US financial system they could not any business in US dollars. Given the current dominance of the dollar in all aspects of global finance banks without access to the US financial system may as well shut their doors. Sooner or later some clever person will find a way around this dollar-domination, but at the moment it gives America a weapon more powerful than any nuclear bomb.

And this is precisely the weapon hanging over Turkey. One of Turkey’s major state banks – Halkbank – stands accused of violating the sanctions against Iran. The details of that sanctions busting were outlined in a colourful American trial involving one of the central characters in that scheme and an unfortunate executive of Halkbank who picked the wrong time to visit the United States. This executive was found guilty and now resides in a federal prison.

Testimony at this trial deeply implicated Halkbank in sanctions busting

No decision has been made yet on the amount of a fine that Halkbank could face. This is part of the negotiations involving the fate of an American evangelical pastor – and other Americans – held in Turkish prisons on unspecified charges of aiding an attempted coup in 2016.  The fine could be small and symbolic. Or it could be the multi-billons of dollars that other international banks have faced. A hefty fine of more than $5 billion would hurt Halkbank a great deal. What would be worse would be Erdoğan refusing to pay that fine because he considered it a violation of Turkish sovereignty. Then Halkbank could lose access to the US financial system. The knock-on effect of that is hard to predict – but it won’t be positive.

Will Trump pull this trigger? Will he sacrifice Turkey just to show how tough he is – or thinks he is? How would Erdoğan respond? Is there a chance that economic and political sanity might prevail? Unfortunately, it’s too early to tell.